Zillow Is Overvalued

You want power? You want strength? Take a look at Zillow (Z), the heavily shorted real estate Web play that is soaring. The shares are up $6 on the day, and are now trading well above where the company priced its $82 secondary. Considering that the secondary was poorly received initially and broke price immediately, this is a remarkable renaissance. It's the only part of the housing-real estate sector that's doing well -- even as it is by far the most overvalued of all the stocks in the industry.

By contrast, Realogy (RLGY), which represents 26% of all transactions, is barely up today even as it put on its best face on "Mad Money" last night and sales continue to grow at a 17% to 19% pace. Realogy's now a plus $3 billion company and all it does is list real estate. Despite Realogy's $5 billion in sales, the company is valued at about $6 billion and is barely up this year.

Zillow, with $150 in revenues, is worth $3.7 billion and is up 240% for the year. That's just a testament to how much people love growth as Zillow could grow revenues as quickly as 60 to 70% for the year. Oh, and did I mention it has no earnings?

You want another wild contrast? Apollo Group (APOL) exited Realogy at $47 and change in a gigantic secondary offering of 25 million shares. The stock's been down ever since then. But Zillow's secondary (also of insider stock) seems to have re-energized the stock after that initial decline.

I think this divergence has less to do with real estate and more to do with a dearth of multiple revenue stream Internet companies. Check out Yelp (YELP) and LinkedIn (LNKD), two other similar business models to Zillow. They just keep running and running.

Some of this is pure short squeeze. The shorts treated Zillow as a housing play and bet that it would go down with the homebuilders and Realogy. Turns out it is a kind of social, mobile and cloud play that's viewed as a remarkable success.

I think Zillow is overvalued. But like Yelp and LinkedIn, as well as Netflix (NFLX) and Amazon (AMZN), it is loved. Realogy might be undervalued and is hated.

Shorts: Be careful what you bet against. Zillow isn't a housing play. It's the latest and greatest use of the Web!

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